17-1
Ratios
Ratio analysis is among the most popular and
widely used tools of financial analysis.
A ratio expresses a mathematical relation between
two quantities.
While computation of a ratio is easy, its
interpretation is more complex.
Ratios are tools to provide us with insights into
underlying conditions.
, 17-2
Ratios
Ratios can be expressed in three different
ways:
1. Ratio (e.g., current ratio of 2:1)
2. % (e.g., profit margin of 2%)
3. shs. (e.g., EPS of shs.2.25)
CAUTION!
“Using ratios and percentages without
considering the underlying causes may
lead to incorrect conclusions.”
, 17-3
Categories of Ratios
Liquidity Ratios
Indicate a company’s short-term
debt-paying ability
Equity (Long-Term Solvency) Ratios
Show relationship between debt and equity
financing in a company
Profitability Tests
Relate income to other variables
Market Tests
Help assess relative merits of stocks in the
marketplace
Ratios
Ratio analysis is among the most popular and
widely used tools of financial analysis.
A ratio expresses a mathematical relation between
two quantities.
While computation of a ratio is easy, its
interpretation is more complex.
Ratios are tools to provide us with insights into
underlying conditions.
, 17-2
Ratios
Ratios can be expressed in three different
ways:
1. Ratio (e.g., current ratio of 2:1)
2. % (e.g., profit margin of 2%)
3. shs. (e.g., EPS of shs.2.25)
CAUTION!
“Using ratios and percentages without
considering the underlying causes may
lead to incorrect conclusions.”
, 17-3
Categories of Ratios
Liquidity Ratios
Indicate a company’s short-term
debt-paying ability
Equity (Long-Term Solvency) Ratios
Show relationship between debt and equity
financing in a company
Profitability Tests
Relate income to other variables
Market Tests
Help assess relative merits of stocks in the
marketplace
